Knowledge Base
Calculate rates of return on financial instruments
Which method must be used to publish the performance of a UCITS according to the AMF?
The AMF requires the TWR because it neutralizes capital flows and measures the manager's performance independently of investor decisions. The MWR incorporates these flows and is not used for this publication.
Which formula is used to calculate the dividend yield for a stock?
The dividend yield is calculated by dividing the annual dividend by the share price and multiplying by one hundred. For example, a stock trading at 100 euros paying a dividend of 5 euros has a yield of 5%. This formula is specific to equities and does not apply to other financial instruments.
What is the yield on a zero-coupon bond purchased at 80 and redeemed at 100 in 3.5 years?
The annual yield is calculated as the nth root of the ratio of par value to price, minus one. Here, (100/80)^(1/3.5) - 1 = approximately 6.58%. This method is specific to bonds without coupons.
TSR (Total Shareholder Return)
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TSR incorporates capital gains and dividends received. It is calculated by adding the price change and dividends, then dividing by the initial price. Example: purchased at 100 euros, sold at 110 euros with a 5 euro dividend gives a TSR of 15%.
The TWR (Time-Weighted Return) incorporates investor capital flows in its calculation.
The TWR is designed to neutralize the impact of capital flows. It measures the manager's performance independently of investors' timing decisions. In contrast, the MWR (Money-Weighted Return) incorporates these flows. The AMF requires the TWR for publishing UCITS performance.
For a bond with a 5.30% coupon, purchased at 101.55% of par with a 5-year maturity, what is the approximate yield to maturity (YTM)?
The YTM is calculated by adjusting the current yield for any premium or discount. Here, the current yield is 5.30% / 101.55% = approximately 5.22%, then subtract (1.55% / 5 years) to get approximately 4.91%. This approximation is valid for coupon-bearing bonds.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Equities
Bonds
Dividend yield and TSR are specific to equities as they incorporate dividends and price changes. Current yield and YTM apply to bonds as they are based on coupons and the redemption structure.
Annualization of performance is always permitted for periods shorter than one year under GIPS standards.
GIPS standards prohibit annualization for periods shorter than one year as it can distort comparisons. The AMF follows this rule to avoid distortions in the assessment of short-term performance.